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Will the Election Give the Market What It Wants?

Markets hate uncertainty, and the uncertainty about who will lead the country, and how, ends with Tuesday's election.

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The election could be a turning point for markets and the economy. The tight race between President Barack Obama and Republican rival Mitt Romney has made for a high level of anxiety, and on Friday, traders quickly shrugged off a better-than-expected October jobs report and shifted focus to the election. (Read more: Unemployment Report: Final Fodder for Election)

Stocks sold off Friday but were flat for the week, which was cut short by Super Storm Sandy's two day closure of trading. There were slight losses in the Dow and Nasdaq, and a slight gain in the S&P 500 . The S&P 500 lost nearly a percent Friday to 1414, reversing Thursday's gain. (Read more: Stocks End Near Lows; Apple Tumbles 3%)

"I think a lot of what's happening today is probably investors taking advantage of yesterday's rally, not wanting to hold through the election, and waiting for what the market does after the election," said Gina Martin Adams, institutional equities strategist at Wells Fargo Securities.

Adams noted the S&P has been trading under its 50-day moving average, of 1434, and it tested it again Friday. "The market seems to have decoupled from economic and earnings data," she said. "We keep getting positive economic data and earnings revisions have actually gotten less bad, but that's not enough to keep the market in an upward trajectory. It's probably a combination of uncertainty to do with the election and just plain technical." (Read more: What the Jobs Report Says About the Housing Market)

She pointed to the divergence between the Dow industrials and the transports, and also the fact that copper, a leading indicator of economic growth, has been lagging.

Romney is Wall Street's favored candidate for his position on taxes and fiscal policy, but the tension around this election is especially high since the candidates continue to run neck and neck in the polls. But regardless of who wins, analysts say it is important to end the lack of clarity on what direction Washington will take on tackling the country's fiscal challenges.

"If it's your big event, it's going to be hard to position one way or the other," said David Ader, chief Treasury strategist at CRT Capital. "We're going to have this critical piece of information. In my own view, what happens Tuesday could set the tone for the next four years. I'd rather trade the four-year trade than the one-month piece of data. It's a very big deal."

Earnings from retailers, like Macy's and JC Penney and media companies, like Disney and Time Warner, in the coming week should not have much bearing on trading. Nor will the handful of economic reports, including weekly claims, consumer sentiment and trade data. Investors will also be watching the recovery after Super Storm Sandy, which slammed the east coast.

Earnings on Tap

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One concern in the markets is that the election will end Tuesday night with no clear winner, as in the 2000 election. "Hopefully we have an answer right away, regardless of who wins, and then 15 seconds later, the question will be 'what are we doing with the fiscal cliff?" said Art Hogan of Lazard Capital Partners. The fiscal cliff is the dual expiration of tax cuts and the start of automatic spending cuts, starting Jan. 1, if Congress fails to act in the lame duck session.

"I think it's going to be an extremely interesting week, but I think the pace of activity increases," Hogan said. "I think we've been in wait-and-see mode for a while … I think any sort of constructive conversation about the fiscal cliff that shows a resolve gets market activity going again. That will be a trigger point. That would get people back engaged."

The October jobs report was the best in eight months, with 171,000 nonfarm payrolls added. But it failed to rally a market that had been lifted the day earlier by stronger manufacturing ISM and construction spending, and an improvement in jobless claims.

The bond market stayed in a close range this past week, with the 10-year ending the week yielding 1.728 percent late Friday. "Week over week, we're pretty much unchanged. That's surprising given how much of the data has been on the firm side, but we're waiting to see the election outcome, and presumably if Obama is elected we'll probably try to mount a rally and see how far we can go," said Ader.

He said the bond market views a Romney win as better for dealing with the fiscal cliff and debt-ceiling issues. Adams said it would also probably be a better outcome for the stock market, since status quo in Washington pits the Democratic president against a mixed Congress that would likely fight him. An unlikely change in the makeup of the House to Democratic majority, if Obama wins, would make it easier to resolve the cliff just as a Republican sweep in the Senate would make it easier should Romney win the presidency.

As for the market, it will probably not move ahead until it's clear how the cliff will be handled. "I think it's unlikely we can surge back without the removal of uncertainty. I think it's more likely that we test the 200-day moving average and move lower rather than higher, unless the election changes things," she said. The 200-day moving average on the S&P 500 is 1379. Adams said a Romney win would also be bullish in that it would boost capital spending, which companies have said they are holding back on due to uncertainty about taxes and the fiscal cliff.

Analysts said a Romney win would be a surprise and boost the stock market, as the market has been pricing in an Obama win. In the bond market, there could be a move in either case, said Ader.

"The feeling is if Obama wins, it's a 10 basis point rally, and if Romney wins it's a 20 basis point selloff," said Ader.

What to Watch

Monday

Earnings: Con Ed, Toyota, Rockwell Automation, Humana, Time Warner Cable, Southern Co, Transocean, Express Scripts, Plains All American, Tesoro, Weight Watchers

1000 am ISM nonmanufacturing

Tuesday

Election Day

Earnings: Nissan, CVS Caremark, Dish Networks, Computer Sciences, NYSE Euronext, Marathon Oil, PG&E, Office Depot, AOL, Liberty Media, International Flavors and Fragrances

1000 am JOLTS

0100 pm $32 billion 3-year note auction

Wednesday

Earnings: Telefonica, Time Warner, Burberry's, Macy's, Molson Coors, Wellpoint, Centerpoint, Energy, Qualcomm, CBS, Activision Blizzard, Prudential Financial, Monster Beverage, Whole Foods

0700 am Mortgage applications

1030 am Oil inventories

0100 pm $24 billion 10-year note auction

0300 pm Consumer credit

Thursday

Earnings: Disney, International Game Technology, Nordstrom, Public Storage, Kayak, Siemens, Duke Energy, Frist Energy, Kohl's, Manulife Financial, Tim Hortons, Advanced Auto Parts, Wendy's, Zipcar, Nvidia, Kohl's, Westar Energy, Duke Energy

0700 am Bank of England rate announcement

0745 am ECB rate announcement

0830 am International trade data

0830 am Weekly jobless claims

1030 am Natural gas inventories

0100 pm $16 billion 30-year bond auction

Friday

Earnings: JC Penney, Alliant Energy, Allianz, Brookfield Asset Management, Energizer, Foster Wheeler, Covidien

0830 am Import/export prices

0955 am Consumer sentiment

1000 am Wholesale trade

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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